City financing would enable Harbor Point developer to make $174 million

The $1 billion Harbor Point development would reap a profit of $124 million for its investors without government financing to pay for its infrastructure, according to recently released city documents.

That may seem like a huge payoff, but it's not enough to attract the large investors the Harbor Point Development Group LLC needs, according to the Baltimore Development Corp., the city's quasi-public development arm.

That's why the BDC has asked the City Council to approve issuing $107 million in city bonds to pay for the infrastructure. The so-called tax increment financing bonds would be paid for by future tax revenue the project generates. With the city financing, the project's profit would rise to $174 million by 2031, and the rate of return for investors would climb to 14 percent from 10.7 percent, according to the BDC documents.

"Even in my short tenure, there have been many developers who have come in saying they couldn't do anything for returns far greater than what we're talking about here," said Brenda McKenzie, president of the BDC, in an interview with The Baltimore Sun.

The newly released BDC documents show the project is expected to receive $88 million in property tax credits because of its inclusion in the city's Enterprise Zone — intended for impoverished areas — and $24 million in property tax credits because it is being built on the contaminated site of the old Allied Signal plant. Such credits reduce a property's tax bill.

The BDC provided the documents to Councilman Carl Stokes — who released them to the public — after Stokes threatened to delay a hearing on the city financing unless the Rawlings-Blake administration turned over reports showing that the project could not be built without TIF funds. The administration is asking the City Council to approve legislation that would authorize the city to issue the tax-exempt bonds to pay for the project's roads and utilities as well as a bridge, a park and a waterfront promenade.

"Without TIF financing, the project ... would not attract outside investors," the BDC wrote in its application for the financing. Without taxpayer assistance, the development's payoff for investors would be "prohibitively low to justify the risk and expense of moving forward to the project without TIF assistance."

Stokes, chairman of the City Council's taxation committee and a frequent critic of how the city subsidizes development, said he remains unconvinced that the development could not be built without city assistance. He has scheduled a hearing on the financing July 17.

"It doesn't sway me at all," Stokes said. "The project will get built without public financing because they have two Fortune 500 companies standing there with checks in hand."

Harbor Point is a $1 billion mixed-use waterfront development between Harbor East and Fells Point that would house a regional headquarters for the energy giant Exelon Corp. Already home to a Morgan Stanley facility, it would feature office buildings, residential towers, stores and a hotel.

Currently, the site is assessed at $10 million, but the BDC projects it would be valued at $1.8 billion for tax purposes when completed, the documents show. With such a value, it would produce an average of $19.6 million a year in property taxes, the documents state.

The developer would spend $60 million of the bond funding to build seven small parks, $21 million on a promenade and $10.4 million on a bridge extending Central Avenue to the site. A $2 million contribution would be made to The Crossroads School, a nearby charter school. The rest would go toward infrastructure improvements along the development's streets and piers.

"If the private sector had to pay for parks, promenades and/or roads — or just parks and promenades — it wouldn't get built," said Michael S. Beatty, who leads the development group. "That site has been sitting for a tremendous amount of time by itself."

Darrell Doan, the BDC's managing director of real estate development, said the agency is confident the project would not secure investors unless it can promise a rate of return greater than 12 percent.

"The biggest indication is the site has been sitting there empty and it hasn't attracted investment," Doan said. "We do a lot of deals at BDC. ... I don't know any deal being done at 9 percent. In fact, I don't know of many deals being done at 12 or 14 percent. ... That's our sense of what we know about the real estate market and the acceptable rates of return."

Should the developers reap profits greater than 20 percent, the city would receive 15 percent of those additional profits, the documents state.

Beatty said his company is taking on significant risk by building the project and warned that the real estate market will inevitably go through difficult times in the years ahead.

"One thing I can guarantee is over the next 20 years, the real estate market will go up and down," he said. "Nowhere in that analysis does it show a failure. The simple reality is, real estate projects don't all work out. ... This is a long-term project. It needs to attract institutional-type capital. It takes risk to get it done."

Investors typically demand higher rates of return from real estate than from stocks or bonds because they are investing large sums for a long period in an asset that cannot be readily sold, subjecting it to more risk from economic swings.

Beatty would not disclose the names of the investors backing Harbor Point.

Independent real estate investors had mixed views on whether rates of returns in the teens were needed to attract investors to what they called perhaps the most desirable piece of undeveloped property in the city.

Allan Riorda, a principal in Columbia with Lee and Associates, a national commercial real estate firm, said he's seeing returns of 6 percent to 9 percent on properties. He deemed 14 percent a "pretty good return" for a development as desirable as Harbor Point.

"I don't think it needs to be as high as 14 or 15 percent," he said. "That's great real estate, and everything's been moving toward the water. That's a higher-end development that would attract larger institutional investors. There's risk, but I wouldn't deem it as substantial a risk as building in a different location of Baltimore."

But Steven McCraney, a 20-year industrial real estate developer based in Florida, said the proposed rates of return were consistent with current market rates for deals of that size.

"I know what the public is thinking: How could somebody make so much money?" he said. "But the truth of the matter is: The numbers make sense. They're market-driven numbers. To attract that kind of capital, if they're not getting that kind of return, I don't think they're going to be interested. Nobody's stepping to the plate for 9 percent. Not happening."

Mayor Stephanie Rawlings-Blake has said the Harbor Point project would create about 7,200 construction jobs and that roughly 9,200 jobs would be supported by the businesses that move in.

The former site of the Allied Signal chromium plant, Harbor Point now sits mostly vacant. The developer plans to start work this summer on a 23-story skyscraper to house the Exelon headquarters, space the company would lease from Beatty for about $120 million over 15 to 20 years. The tower would be the first phase of the project.

The information about the development's rate of return and potential profit was included in a supplemental report written June 14 by city consultant Municap Inc., a Columbia-based public finance consulting firm.

McKenzie and Doan said developments are different and that rates of returns vary widely based on the scale, timing and risk of a project.

"I'm sure Michael would like to see a higher rate of return," Doan said. "There's incredible risks involved."